Tax Benefits for Using the Indiana 529 Credit
Considering the increasing costs of education in the U.S., families saving for the future should consider Section 529 plans, also known as "qualified tuition plans". These are tax-advantaged savings plans sponsored by states and educational institutions, and authorized by Section 529 of the IRS's Internal Revenue Code.
Indiana has 134 colleges and universities, with the average annual tuition, books, and housing costs hovering around $8,193 (in-state), $20,951(out-of-state), or $26,580 (private) depending on the type of institution in which a student is enrolled.
Indiana's CollegeChoice 529 Savings Plans offers additional benefits, including tax credits for contributors. Starting in 2019, these plans and tax credits began including contributions intended for K-12 tuition in addition to those for higher education.
Benefits of 529 Plans
With a traditional Section 529 plan, families can begin contributing to a child's educational fund as soon as a baby is born. Through regular (tax-free) contributions from parents, family members, and friends, the account grows over time, and there is hopefully less stress (and prospective student debt) when choose a school, applying for financial aid, or searching for scholarships.
529 Tax Benefits:
- Investments made in these accounts will grow free of federal and state income taxes.
- All withdrawals used for qualified higher education expenses are exempt from federal income tax.
- In some states, such as Indiana, contributors also get a tax credit.
Benefits Specific to Indiana
In 2017, 17 states (including Indiana) began allowing taxpayers to use their Section 529 plans to pay for tuition at private K-12 institutions. Previously, "qualified withdrawals" from Section 529 plans only included expenses related to higher education.
Taxpayers in Indiana who contribute to the state's CollegeChoice 529 Savings Plans can get a tax credit of 20% back on their contribution, up to a threshold of $1,000. Starting in January 2019 (for the 2018 tax year), taxpayers were also permitted to claim 20% back on contributions to fund K-12 education (also up to a threshold of $1000).
This can be a beneficial way to lessen what you owe during tax season. Taxpayers claiming a state tax credit on contributions must keep the account open for at least one year to avoid recapture of the tax credit on distributions used to pay qualified education expenses.
Indiana's CollegeChoice 529 Savings Plans Options
The state of Indiana offers several options to save for a child's education and vest tax benefits.
The Direct Savings Plan is provided directly from the state. It offers an age-based option and several static options. This plan has higher fees than the national average, but it has an established history of good returns.
The Advisor 529 Plan is sold exclusively through an advisor, and includes age-based and static options. If you choose an age-based option, it starts out aggressively, with most investments in stocks. As the child ages and gets closer to college, the investments get more conservative to protect the money contributed. This plan does have fairly high fees, but given the tax credit and potentially strong returns, this is still an excellent choice for educational investment.
Four FDIC-insured options are offered in this plan:
- The CollegeSure CD with a variable interest rate pegged to a private-college tuition index
- The InvestorSure CD with an interest rate pegged to a percentage of the increase in the S&P 500 Index over a five-year period
- Fixed-Rate CDs with one-year or three-year maturities
- The Honors Savings Account, which is a high-yield savings account available from College Savings Bank, a Division of NexBank SSB
The minimum contribution to get started with a CollegeChoice 529 Savings Plan is just $25, allowing families near the poverty line to get started with a modest investment. Anyone over the age of 18, who is either a U.S. citizen or legal resident, can make contributions to a plan, even if they live outside of the state. Indiana caps the size of such funds at a maximum of $298,000.
Indiana does not have age restrictions, nor does it require a student to attend college within a certain amount of years after graduation. If a student decides to work for a few years before going to school, the state's 529 plans will stay intact for their eventual benefit. If a student decides they want to discontinue their formal education altogether, these savings can still be put to good, academic use.
The plan's beneficiary can be changed at any time, thus redirecting money toward the primary, secondary, or higher education costs of another lucky individual. But remember, money withdrawn from such an account for other purposes (outside of education) will face substantial tax penalties.